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TMI Blog2013 (7) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... - (i) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is right in law in confirming the disallowance of Rs.40 lakhs on account of the provision for warranty? (ii) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is right in law in confirming the addition of Rs.87,74,691/- on account of the write back of the provision? 2. The facts leading to filing of tax case appeal are as follows:- The assessee company is engaged in the business of designing, engineering, supply and installation of plant and equipments used in mining and mineral processing industry. The assessee company is subsidiary of FL Smidth Minerals Holding APS, Denmark. In computing the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 008 dated 7.12.2009 for the assessment year 2002-03, wherein the Division Bench of this Court had followed the earlier order passed by this Court in Tax Case (Appeal). No. 341 of 2004 dated 9.6.2009. In both these decisions, this Court following the decision of the Apex Court in the case of ROTORK CONTROLS INDIA P. LIMITED v. CIT (2009) 314 ITR 62, held that a provision is a liability which can be measured only by using a substantial degree of estimation. Taking note of nature of the business, nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee, this Court held that the assessee would be entitled to deduction under Section 37 of the Act for the provision made for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the order of the Commissioner of Income Tax (Appeals), which are safely extracted here too for the purpose of the case, which are as follows:- " Delivery The plant should be given complete in all respects ready for commissioning positively within 13 months and commercial production within 3 weeks of commissioning considering from 12.11.2001. All other payments shall be made in time (within 15 days of receipt of invoice) in order to complete the project on schedule. Liquidated damages Liquidated damages @ Rs.3.8 lakh for delay of every completed week subject to maximum of Rs.36.00 lakh (plus Rs.2 lakh on FFE's nominated erection contractors) shall be applicable for any delay in execution, commissioning and commercial production bey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch kind of expenses and intimate the accounts for such provisions. We make provision for such expenses which is ultimately incurred subsequently". 7. A reading of the above clauses reveals that given the assurance on the capacity of functioning of the machinery and the quality of the product manufactured, the assessee had to make provision for liquidated damages for any shortfall on the assured capacity and quality commensurate to the percentage of the shortfall. Even though such payment is termed as liquidated damages, yet, on going through the various clauses, it is evident that it is more in the nature of warranty as to the performance of the machinery, rather than, granting damages for the short fall in production. Thus the warranty pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. 9. Referring to the decision of this Court reported in (2007) 293 ITR 311 - CIT v. ROTORK CONTROLS INDIA LIMITED, the Commissioner of Income Tax (Appeals) rejected the assessee's plea holding that a sum of Rs.40 lakhs being a provision did not fall under the provision towards warranty. Consequently, no deduction could be allowed in respect of the same. It is neither a provision created towards liquidated damages nor a provision created on a scientific basis or a provision created on the basis of the actual expenditure incurred by the company during the past years, nor it is an ascertained liability. Thus, the Commissioner of Income Tax (Appeals) allowed a sum of Rs.1,13,21,638/- alone following Income Tax Appellate Tribunal's order in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no provision could be recognised. Although the Commissioner of Income Tax (Appeals) pointed out the obligation that had arisen to the company has to be seen by reason of its assurance given on the aspect of quality production and the extent of production, yet he failed to take it to the logical end in granting the relief. Thus, when the company made reliable estimate based on the performance capacity and the quality therein and the materials relating thereto, we do not find any justifiable ground to reject the plea of the assesee on the provision made to the extent of Rs.20 lakhs. The Commissioner of Income Tax (Appeals) pointed out to the distinction between the liquidated damages for the delay execution and the liquidated damages for no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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